Bitcoin Blockchain Introduction

About the Development history and main application funktions. introduction


 

1.1 Bitcoin History


The idea of a digital cryptographically secured peer-to-peer (node to node - decentralized) currency is probably as old as the Internet itself. The first demonstrable considerations were already discussed in the cypherpunk-mailinglist in 1992. The fact is that the technologies required for Bitcoin only had to be developed over decades before the time became ripe.

Bitcoin is not subject to inflation, it is not controlled by individuals, banks or governments. The Bitcoin transactions are protected by digital ciphers and are verified decentrally in a large network of about 100.000 independent computers, so-called nodes. Just imagine how simple it is:

A person possesses a unit of digital data that is valuable. This data is known only to this person, so it has its value. The persons in the network are pseudonymised for this purpose, which guarantees a high degree of anonymity and privacy when used appropriately.

The whitepaper of the first successful digital currency, the Bitcoin, was presented by Satoshi Nakamoto for the first time on 1.11.2008 in this same mailing list. It differs interestingly only in technical details from the 1994 published "Digicash" Whitepaper (failed digital currency).

The network starts on 3.1.2009, the open source reference implementation, the Bitcoin core, was released on 9.1.2009 under an MIT license for free use. On this day the first nodes were set up and the first block of the so-called Genesis Block (search for "#1" in the Blockchain Explorer) was calculated.

The Bitcoin technology is based on several original developments and technologies. On the one hand probably the developments and experiences from earlier try digital currencies, then an algorithm of elliptic curves and digital signatures ECDSA (Elliptic Curve Digital Signature Algorithm) & SHA256 (Secure Hash Algorithm 256Bit) with which a hash value is generated, the digital fingerprint, but more about this later.


In the 1980s, Dr. David Chaum wrote about anonymous digital cash and pseudonymous reputation systems that make "Big Brother" obsolete: "Security without identification: Transaction Systems to Make Big Brother Obsolete". Because of this there are speculations that David Chaum is truth Satoshi Nakamoto.

In the 70s of the 20th century scientists worked intensively on a cryptographically secured currency on behalf of the National Security Agency of the USA. Hence the myth that Bitcoin is actually a government project, which is of course ridiculous if we understand how this revolutionary and disruptive technology works.

In the 90s cryptographers continued this research. We are constantly confronted with the results of their work without having a clue. Among these cryptographers was probably Satoshi Nakamoto, the ingenious inventor of Bitcoin. It recently became known that a cryptographer in the 90s was working on algorithms from which Bitcoin later emerged.

Satoshi Nakamoto is a legendary personality. Nobody knows exactly who is behind this name, neither a man nor a woman can be, nor even a team. It was researched in the block history and Nakamoto was assigned several addresses, with a credit of nearly 1Million Bitcoin! Rumour has it that a team was involved in the development, with one person making a crucial contribution, in whose honour the Whitepaper and the Smallest Unit Possible was named: A Satoschi is 10^-8 BTC (0.00000001).

Nobody doubts that Satoshi invented a brilliant system and wrote a brilliant key to it. In the whole world there were at most 50 people who were capable of something like this, but it remains unknown which of them adopted this name. It was even possible to contact this person on the Internet, in forums or by e-mail. (The whitepaper contains an email address satoshin@gmx.com)

Satoshi Nakamoto's post

This communication gives us some information about Satoshi's work. We know that he designed the Bitcoin in 2007. It took him two years to see how this idea could be implemented, and he certainly used developments from earlier projects such as Digicash. In his e-mails, he talked about a reliable payment system that cannot be controlled by individuals, officials or private companies.

He got answers, studied them and refined his idea. In the fall of 2008, the whitepaper signed by Satoshi Nakamoto appeared. In it he described his system in detail. The experts were amazed. The Bitcoin inventor found an ingenious solution to the main problem that had previously prevented the establishment of Internet money. It was the problem of double bookings.


1.2 Introduction in double bookings and trust

 

Blockchain It is therefore a problem that prevented the start of such a payment system earlier. Suppose someone has a digital key that has a value and that person wants to give it to me in return. How can I find out if he sent this key only to me or to another person? He could copy the key and send it to two people? This is the problem of double bookings How did Nakamoto solve this problem?

If the seller sends one and the same Bitcoins to two buyers at the same time, only one transaction is verified, the second transaction is no longer valid. This creates a system in which people who do not know each other at all, who have never seen each other and who are not linked by mutual trust can transfer money to each other without intermediaries. In this system, a transaction is checked and processed for double postings as follows:

The Bitcoin miners, i.e. persons who check and process payments using their computers, receive new Bitcoins as commission. The system therefore rewards them for their work. New Bitcoins are generated by a random process approximately once every ten minutes. All Bitcoin miners participate in this lottery (previously nodes and miners were not separate).

The miners guess with their hardware a hash value and the nonce (an arbitrary number) to determine the digital fingerprint of a so-called block. A block contains the data of the transactions (UTXO Unspend Transction Output) and the signatures (public keys) with time stamp. In addition, this block is cryptographically linked to the previous block by including the hash value of the previous block.

Finding the right hash value is called finding a block, now this block is propagated over the network of nodes. The nodes check each other for the correctness of the data chain "blockchain" and exclude those nodes which are not synchronous with at least 51% of the network. If the block is successfully published, the Miner receives the sum of the transaction fees and the current block reward.

The inflow of Bitcoins works differently than the inflow of Euro, as many Euro are printed as necessary. The Bitcoin is subject to a complex and strict set of rules. What happens if the computing power in the network is increased? The mathematical functions for finding the blocks adapt dynamically to the computing power.

The computational power changes sometimes, this can lead to the fact that a block needs only a very short or very long time interval to be found. The adjustment of the computing power to the Math. function is done by a factor called "Difficulty". On the one hand, a function adapts directly after the last found block: If the block was found under 10 minutes, the difficulty of the task is increased.

If it took longer than 10 minutes, the difficulty of the task is reduced. Then there is another Difficulty, which adapts all 2016 blocks. The blockchain is a unique cryptographic procedure, we can understand it as a digital immutable register. Once published in the blockchain, data can no longer be deleted. The simplest application of this technology is of course a digital currency, but it can do much more.

We will later understand the blockchain through specific use cases as the next generation Internet, the "Internet of Originals", which is technologically not dependent on the Internet 2.0 the network of copies as we know it!


1.3 What does the value & number of bitcoins depend on?

 

In simplified form the system works as follows: Every 210,000 blocks (3.95 years) it distributes half of the remaining bitcoins. This means a mathematical function that approaches a limit of 21 000 000 in the year 2140. From 2009 to 2012 it distributed 50 coins every ten minutes. That made 2.6 million coins per year from 2012 to 2016 it distributed 1.3 million!

On the 11th birthday of the white paper, the number of Bitcoins in circulation reaches 18 million. According to studies, at least 4 million coins have already been irretrievably lost, as the corresponding private keys have been lost. On the one hand there is inflation which is halved every four years and on the other hand credit can be lost if users do not take care of their private keys. But more about this in the chapter about Wallet key pairs.

The first Miners did not check and process transactions for rewards, but to hope that one day they would be useful. 10 years ago you could do this work at home, on a regular PC and get bitcoins for it. At that time they cost less than the electricity and internet fees for a miner. In 2010, the system generated 7200 coins per day worth a total of around 350 US dollars.

Later, however, an initial exchange rate of 5 cents per coin was offered. The first speculators appeared, they did not want to process transactions for days to earn Bitcoins, but were willing to buy Minern Coins. Now everyone has their fun! Some want to accumulate Bitcoins and others want to write and check numerical codes. But both have contributed to the value of Bitcoin today.

The miners were willing to work almost free of charge. The others had so much faith in this idea that they paid real money for a number key. So the most expensive currency in the world was born, which paved the way for other similar cryptographic systems.

 

1.4 Three main advantages of Satoshi Nakamoto's system is attractive to many different customers.

 

It differs in many ways from a familiar banking system. But three differences are most important:

1. decentralized structure.

The Bitcoin buyers of the first wave appreciated this feature the most. These people wanted to spend their money and not be accountable to any government. They did not agree with the state policy and did not want to participate in the circulation of the state currency on which this policy was based.

2. anonymity.

The second wave of buyers was attracted by the fact that, with the help of Bitcoin, it was possible to conduct any illegal business over the Internet without running the risk of having their accounts blocked. They sold weapons and drugs, paid for bets at illegal casinos. So with the help of the Bitcoins, many dirty deals were made almost openly, which of course damaged the reputation.

There are trade portals on the Internet (for example the former Silk Road portal) where you can buy practically anything for Bitcoins, including any illegal products. However, it must be assumed that the payment system is only an instrument.

CAUTION! Bitcoin only pseudonyms users, never buy illegal items over the Internet!

Bitcoin payments can be tracked because everything is stored in the blockchain. There are of course a lot of ways you can use Bitcoin completely invisibly and anonymously, more about this later in the chapter on transactions. It has no morals, it can be used by criminals as well as "heroes". Just think of Julian Assange and the WikiLeaks project: The banking system doesn't want to serve them in the same way as drug dealers do. Purely for political reasons.

The Bitcoins enabled the WikiLeaks project to continue its work. The use for criminal business, on the other hand, decreases over the years. According to studies, only 0.2% of all transactions are used for criminal business. The size of money laundering and the size of arms dealing is demonstrably taking place in the banking sector!

3. inexpensive transactions.

The third wave of Bitcoin buyers was the biggest. These people were looking for profit. The Bitcoin is a very hard currency, because everyone knows from the outset how many Bitcoins there can be in total: 21 million. The most attractive thing is the lack of commission fees. Transaction fees are the necessary fees for the miners.

Now we want to turn our attention to micro-transactions with the help of the crypto currency. Today, for example, it is not possible to transfer 5 cents in the USA. That would not make sense, because the minimum commission for the use of a credit card is 30 cents, on top of that you have to pay 2 percent of the transfer amount. So you have to pay 30 cents to transfer 5 cents.

Suppose you want to do something good and transfer one dollar to a foundation. You have to pay 30 cents commission. The Bitcoin solves all these problems and gives us new opportunities. This is why it has become so interesting for everyone. The standard fees of a regular transaction with the original address format are 0.001 BTC, which is naturally unacceptable at higher prices.

Using the newer address formats like SegWit (3...) and native SegWit Bech32 (bciq...) addresses and second layer technologies like Lightning Network or Liquid Network the fees are drastically reduced!

 

1.5 What happens with next?

 

It's always been like this: First a new technology emerges and then a lot of companies emerge that use this technology. There are already companies that are creating infrastructures so that everyone is able to do it: 1) Convert ordinary money into coins, 2) to reliably store coins and 3) Coins can be issued without any problems. In other words, there are exchange offices, wallet software, payment systems and platforms like the Bitcoin Uni.

Secondly, such companies have the task of explaining the new system to a newcomer of any age, with any level of education and at any location in an easy and understandable way, so that even a grandma can easily buy, sell and spend her coins. This is exactly where many people come from when companies run wallets and stock exchanges, they are third parties who need to be trusted.

But what we have learned in 10 years of Bitcoin is that no third party can be trusted in money transactions. Central stock exchanges have been hacked again and again and it is cheated, scams lurk at every corner and want to our Satoshis. In any case, many experts believe that the future of the global financial system belongs to the crypto currency. It is supposed to change both the financial structures and human life in general.

On the one hand through transparency e.g. of the state towards its citizens with simultaneous anonymity of the individual, if he knows how to use this technology. The Blockchain has far more interesting and extensive application possibilities, the Bitcoin Blockchain is according to Andreas Antonopoulos only 67% researched!

Before the invention of the Internet, we could not imagine how it would affect us all. In the same way, the blockchain will change our lives. At that time people did not understand what paper money is. And today not everyone understands what digital money is. But everything changes very quickly.

In each case we will experience a very exciting time - the epoch of the crypto currency. And the sooner we understand this, the more we can make of it today. The experiences of the centuries show that the greatest success always reaped those, which were present from the outset.

The largest gold nuggets were found by the seekers who had started their search before the gold rush. Some legendary miners of the first Bitcoin years made a fortune with it. The future of technology also has its downsides, so there is no denying the waste of power resources on the hardware.